Last week, the National Institute for Economic and Social Research (NIESR) predicted that consumer price inflation will grow to 4% in the second half of 2017.

Sam Howard, COO of Regentsmead, has now warned bridging lenders that their borrowers may face higher build costs as a result of this inflation.

“My view is that inflation will rise significantly as sterling’s dramatic fall has increased imported inflation,” Sam admitted.

“We don't see inflation in itself having a detrimental effect on our borrowers, as property tends to rise in periods of inflation as people want tangible assets, however, they might have to factor in higher build costs.

“We are seeing it now with Marmite and our borrowers are telling us that the vital ingredients of a common home might well become more expensive in 2017, especially if they are European kitchens, appliances or bathrooms.”

Sam warned that this inflation could also begin to affect lenders’ rates.

“The issue could be if interest rates start to rise next year to counter the inflationary surge. 

“This could have an impact on the housing market.”

Meanwhile, Benson Hersch, chief executive of the Association of Short Term lenders, warned that inflation could affect other aspects of borrowing.

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“The rise in inflation may well affect refinance strategies where affordability is tested,” Benson suggested.

“However, much depends on whether the current Bank of England policy of low interest rates, and the reduced exchange value of the GBP continues.”

Benson advised lenders to monitor how consumers react to any rises in inflation.

“In my opinion, the key issue is consumer confidence, although at the moment it seems to be holding up.

“Lenders must keep a close watch on property value trends and on the long-term mortgage market.”

Inflation and interest rates

In addition to the NIESR report, last week the Bank of England also suggested that inflation may rise above previous targets.

In the BoE’s latest projections, inflation is expected to rise from its current level of 1% to approximately 2.75% in 2018.

The announcement came as the BoE voted unanimously to maintain interest rates at 0.25%.

Commenting on this news, Richard Pike, sales and marketing director of lending and savings software provider Phoebus Software, suggested that rising inflation could help to keep interest rates down.

“With the Bank of England holding interest rates … it is likely that rates will remain unchanged for some time to come, which is positive news for borrowers.”